Q: I have a superannuation fund accumulating (although I am no longer making super contributions). I am 52 and I intend retiring at age 60. When I do retire can I withdraw the entire super fund as a lump sum and deposit it in to my bank account? What would the tax implications be for taking the entire fund as a lump sum? Or could I turn the fund into a super pension and receive a regular income? What are the tax implications for that option? The entire value of my fund is preserved.
A: Before I respond to the question, for those readers who are not familiar with the term ‘preserved’ in relation to super benefits, the Government has rules in place to ensure that Australians don’t access super benefits before they retire or before they satisfy another condition of release, such as suffering permanent disability. You can read about ‘preservation’ and ‘preserved benefits’ and ‘conditions of release’ in the article Accessing super early: 14 legal reasons to cash your super.
Your question has two parts – the tax treatment when taking a lump sum, and the tax treatment when taking an income stream.
You mention that you intend to retire at age 60, so this article only deals with the tax treatment of lump sums and super pensions taken or after the age of 60. If you seek information on the tax treatment of super benefits withdrawn before age 60, then see SuperGuide article Retiring before the age of 60: the tax deal.
Generally speaking you can expect the following tax treatment for Australian superannuation benefits received on or after the age of 60:
1. Treatment of lump sums, on or after age 60
In nearly all cases, an individual retiring from the workforce on or after the age of 60 can withdraw super benefits as a lump sum and no tax will be payable on those super benefits in Australia (although Australian citizens living overseas will need to get tax advice on their individual circumstances).
A major exception to this statement that ‘no tax will be payable’ is: If you’re a long-term member of one of the older public sector funds, then some or nearly all of your super benefits may be considered ‘untaxed benefits’, which means no earnings or contributions tax has been payable on these benefits yet. When the super benefit is withdrawn from the fund, a benefits tax is payable on the taxable component of the benefit from these untaxed funds, even when taken after the age of 60.
Note: If you’re a long-term member of certain employer-run super funds (usually major companies), you may be required to take an income stream (pension) from the fund rather than a lump sum. I believe this exception also applies to a minority of defined benefit public sector funds. Most Australians are members of super funds that permit lump sum payments.
Important: By taking super benefits out of the super system, the concessional tax rate of 15% on fund earnings will no longer apply – any earnings on the lump sum invested in a non-superannuation environment, after a person withdraws the super benefit, will be subject to the person’s marginal tax rate. Australian marginal tax rates can range from zero to 45% (plus Medicare levy). (If you’re an Australian living overseas, I suggest you check with a tax expert about the implications of an individual living in another country receiving income from an Australian source.)
If an individual starts a superannuation income stream (pension), then any earnings on the super fund assets funding the income stream are exempt from tax. This exemption from tax on earnings is in addition to tax-free super benefit payments for over-60s. I explain this further in the next section.
2. Treatment of income streams (pensions) on or after age 60
If you’re aged 60 or over and retired, you can take your super benefits as an income stream (or as a lump sum – refer earlier) and pay no tax in Australia on your benefit payments. The major exception to this general rule is where an individual is a long-term member of a certain type of public sector super fund, and then some tax may be payable on the taxable component of the pension (or lump sum).
The earnings on any investments financing a superannuation income stream are also tax-free (or to be precise, tax exempt), whether you retire before or after the age of 60.
Since the introduction of tax-free super benefits for over-60s from July 2007, retirement planning has definitely become easier but I suggest that anyone thinking about retirement, should check their personal circumstances with an accountant (and for our Aussie expats scattered around the world – an Australian accountant/adviser, as well as a local accountant/adviser).